World Bank scales back growth outlook for East Asia
China's growth slows to 7.5%, emerging economies anticipate end to U.S. Fed stimulus
The World Bank cut its 2013 growth forecast for East Asia's developing countries on Monday, reflecting regional powerhouse China's slowdown plus the looming end of the United States' cheap-money stimulus policy.
The international lender said it expects the region's emerging economies to grow by an average of six per cent this year, down from its April prediction of 6.5 per cent.
China was forecast to expand by 7.5 per cent, lower than the 8.3 per cent April outlook. The world's second-largest economy's rapid acceleration is slowing as it shifts to an economy driven by its own consumers instead of mostly exports, and growth hit a two-decade low in the second quarter.
The World Bank also warned China about "shadow banking," urging it to tighten financial rules and said there is a risk of municipal debt running out of control.
U.S. stimulus has poured money into emerging markets
Other developing Asian economies have been hit by weaker demand, plus worries that the U.S. will pull back its loose monetary policy that has poured funds into emerging markets.
Lower global commodity prices and weaker-than-expected export growth have also slowed growth in larger middle-income countries including Indonesia, Malaysia and Thailand, the World Bank economic update said. The Philippines, though, was forecast to continue its surge of the past two years with a forecast expansion of 7 per cent, nearly double the rate of two years ago.
Asia's developing economies may get a boost now that growth is finally picking up in the U.S., Europe and Japan, traditionally their biggest export biggest markets.
World Bank on managing risk
The World Bank is urging emerging economies to learn how to manage for risks such as natural disasters, financial crises, unemployment and disease.
“We argue that good management can save lives, can prevent crisis and can even open opportunities for progress and development,” said Norman Loayza, an economist for the World Bank and author of the World Development Report,
In an interview with CBC’s Lang & O’Leary Exchange, Loayza highlighted the importance of risk management tools such as an effective building code. He points to the high death toll in the earthquake in Haiti, with no code, compared with Chile, which suffered a much worse earthquake with much less loss of life.
Improved risk management has the potential to reduce the need for aid money, he said.
“If resources are devoted to means to prepare and protect populations and better management of those resources, then yes there is a great deal of impact on risk management,” he said.
"We are seeing a slowdown in domestic demand, which is a headwind, but at the same time Asia is seeing a tailwind from the revival of the rest of the global economy," said Bert Hofman, the World Bank's chief economist for East Asia and the Pacific.
Many emerging economies are also bracing for the U.S. Federal Reserve policymakers' eventual wind-down of its unprecedented monetary stimulus program, which the Fed instituted to help push down interest rates and spur growth following the 2008 financial crisis. But the super-low rates led investors to overseas markets in search of higher returns.
Hints that the Fed might start to scale back the $85 billion US in bonds it buys each month as soon as September rocked developing countries' financial markets and weakened their currencies over the summer as foreign investors started pulling funds out on the expectation of higher returns back home.
The Fed has delayed its "tapering" of the stimulus, but with advanced economies' growth finally picking up, the end of cheap money is inevitable.
Hofman said the delay gives countries "a second opportunity" to prepare for rising global interest rates, falling currencies and possible foreign investment outflow.
'Good time to clean house'
He urged countries to reduce reliance on short-term foreign currency denominated debt and to enact structural reforms such as improving infrastructure and investment climate to lure back investors once the U.S. stimulus incentive dries up.
"This is a good time to clean house," Hofman said of governments and banking systems. "In a way, the talk of tapering in July and August was sort of a very nice general rehearsal for the actual thing."